Public-sector IT projects

A harsh master

The government is Britain's biggest IT customer. That's good and bad for firms

THE last few years have been hard for the IT business. The dotcom crash caused pain everywhere, but computer firms, being in the middle of the bubble, suffered most. The worst is now over, and there are plenty of big contracts about. But in Britain, where the government is on a belated modernisation drive, the recent rise in IT spending has been dominated not by the private sector, but by the public. The government now accounts for more than half of all spending on big IT projects, according to figures from Datamonitor, a market-research firm (see chart).

That's good news for the firms: the state is a gigantic customer, and its contracts are correspondingly juicy. The programme to modernise the NHS is worth £6.2 billion, for example. Within the next few weeks a consortium led by EDS, an American firm, is expected to sign a £4 billion contract to digitise the Ministry of Defence. Even the smaller contracts regularly run into the hundreds of millions of pounds.

But while public contracts may look good for the bottom line, there are plenty of hidden dangers. Bad publicity is one: widely publicised delays, cost overruns and system failures have meant that public-sector IT projects have become a byword for disaster. The biggest recent example was the implosion last year of the Child Support Agency's (CSA) new £465m computer system, but there have been a string of others (the Passport Agency, benefit cards and a new air traffic control system, for example). Earlier this year, the Inland Revenue's website went down as thousands of people tried to file their tax returns at the last minute.

Embarrassed by the bad headlines, the government has been trying to put its house in order for several years. The Office of Government Commerce (OGC) tries to spot problems early with regular progress reviews, and projects are now accountable to a single person instead of a committee. Individual departments are trying to get tough, too. The collapse of the CSA's system cost its boss his job, and EDS, the contractor, a £12m penalty. The NHS wants £4.5m from BT, which is installing a new broadband system as part of the NHS project, after it missed several targets.

All of these procedures seem sensible. Yet some are wondering if the government has gone too far and is now scaring companies off. New standard contracts from the OGC have been criticised by many in the IT business for trying to hive off too much risk on to suppliers while ignoring bigger problems about properly defining, at the start of the project, what exactly the computer systems are supposed to do. The contracts may contain get-out clauses for the government as well as provisions for unlimited liability for firms in the event of things going wrong, which would make insuring projects—usually a requirement—much more difficult. Some think that the firms will respond by charging more. If that's what happens, the new contracts would achieve the opposite of what was intended.

Last year Lockheed Martin, an American firm, pulled out of the bidding process for a big NHS job. Analysts reckon that, faced with the tough new performance measures, it decided that it did not want to risk angry headlines and fines if it was unable to deliver on time. For the government, getting the incentives right is tricky. While it continues to dominate the IT sector, worries over firms taking their business elsewhere look silly. But with the first signs emerging of a revival in private IT spending, it may not be in such a strong position for much longer.